New audit rules deferred for insurers

BY KARL LESTER M. YAP, BusinessWorld Reporter The Insurance Commission, the government body regulating all insurance companies operating in the country, has deferred to this year the full implementation of the new accounting standards which were supposed to take effect for the 2005 financial statements. "We will not take it against companies if their audited financial statements for 2005 is not yet compliant with the new rules. But they must disclose it," Insurance Commissioner Evangeline C. Escobillo told BusinessWorld in an interview. The International Accounting Standards (IAS), also known as International Financial Reporting Standards (IFRS), are being imposed to align Philippine rules with global practice. The new rules were supposed to be implemented by January of this year to cover companies' financial statements for 2005. In a circular dated December 19, 2005, Ms. Escobillo informed insurers of this postponement. "In order to give every life and nonlife insurance company more time to comply with the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) particularly on PFRS 4 and PAS 32 and 39, please be advised... [that] this commission interposes no objection to the request of the Philippine Life Insurance Association, Inc. (PLIA) not to totally comply with the above captioned subject in 2005," the circular read. Based on a letter dated November 10, 2005 addressed to the Insurance Commission, life insurers asked the regulator for more time to implement the new accounting rules. Under the new IFRS 4 or Accounting for Insurance Contracts, insurance contracts need to be reviewed to see if they are protection or investment in nature. "If they are determined to be investment in nature, they would be classified as such, and all related inflows booked as premiums previously need to be reversed out of income statement account and into liability account," the rules say. A few major life companies have been selling variable account or "unit linked" type products for the past few years and have booked all inflows received from the sale of such products as premiums. Adoption of IFRS 4 would mean a restatement of premiums previously reported by these companies and of the life insurance industry as a whole. This might further "erode public confidence in the life insurance industry which has already been eroded as a result of recent negative developments in the pre-need industry," the letter read. PAS 32 directs that mandatory redeemable preferred shares previously accounted for as equity instruments should be treated as debt instruments, both in the books of the investor and the issuer. PAS 39, which was adopted from IAS 39, governs accounting principles involving investment products, deals with measurement and recognition of financial instruments, details procedures for the valuation of financial instruments and requires firms to consider the net present value of all their assets. It obliges companies to book assets based on their present market value and not the acquisition value. But the commission warned companies that they must be fully compliant by this year or else they will face sanctions. "It is deemed understood, however, that effective January 1, 2006, the audited financial statements shall be prepared in accordance with the new accounting standards," the circular said. Ms. Escobillo said the commission is giving insurers more time since it was still in the process of crafting the implementing rules and guidelines of the IAS adoption for the industry. "We ourselves in the Insurance Commission were not able to come up with the guidelines. It will be unfair to enforce it," she explained. With help from external auditors, the commission is set to release the guidelines within this month. The circular also said that "any immediate announcements from the International Association of Insurance Supervisors (IAIS) in line with its position towards the implementation of the new accounting standards shall be taken into consideration." IAIS is a global association composed of all the heads of insurance commissions of various countries. "We participate in the discussion. If there will be new policies regarding IAS implementation, we will announce it to the insurance companies," Ms. Escobillo said. Insurers welcomed the postponement saying it gives the industry more time to prepare. "Definitely, it will allow us more opportunity to comply and adjust since there are many new requirements that we have to embed in our reporting," said PLIA President Peter G. Coyiuto. But insurers admitted that the new accounting rules will adversely impact on some companies. "There would be some companies who might not meet the solvency ratio," Ramon Y. Dimacali, president of the Philippine Insurers and Reinsurers Association, said. He declined to give an estimate. There are currently 95 nonlife insurance companies operating in the country. The solvency ratio ensures that insurance companies are properly capitalized to meet the risks that they retain. It is defined as assets minus liabilities less 50% of capital and it must at least be 10% of retained risks. "If a company doesn't meet the solvency ratio, it will be required to restore it to the required level or else it will be issued a cease and desist order. It cannot continue to write," Mr. Dimacali explained. He said companies should have prepared for the IAS adoption a long time ago. "The seminars on IAS have been going on since 2004," he said. The adoption of the new rules was initiated by the Accounting Standards Council -- or ASC, now the Financial Reporting Standards Council, an independent standard-setting body, and was approved by the Board of Accountancy and Professional Regulation Commission. IAS is not new in the country. The Philippines has been in the process of adopting it for a few years now. But the ASC finally decided to implement all the remaining IAS by 2005 -- a total of 26 standards in all, in addition to the 10 standards that were adopted earlier and are still effective. Of these 26, a total of 14 are revisions of previously adopted accounting standards.